Download Will the concept of goodwill go well with national accounting? Itsuo

Will the concept of goodwill
go well with national accounting?
Itsuo Sakuma (1)
Abstract: The purpose of the present paper is to examine the concept
of goodwill in the context of national accounting. Goodwill, originally
a business accounting concept, was incorporated into the SNA in its
1993 version as a category of intangible non-produced assets, even
though Japanese national accounts have never included it. The 2008
SNA introduced a composite category called goodwill and marketing
assets and included it in the list of non-produced non-financial assets.
By recognising that goodwill is just essentially net worth (as a national
accounting concept) with the sign reversed, it may be very natural to
ask whether it is necessary or not for national accounts. This paper
gives a negative answer to the question and seeks to show that national
accountants can fully and reasonably deal with business acquisitions
without the concept. Some facts from business accounting history
about the concept may bring insight into the problems involved.
JEL codes: E01, M41, G34
Keywords: SNA, Goodwill, Net worth, Tobin’s Q
(1) School of Economics, Senshu University.
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Will the concept of goodwill go well with national accounting?
1.Introduction
Goodwill is a business accounting concept that is
used in national accounts, although this concept has
never been included in Japanese national accounts.
Business accountants would understand that the
concept of goodwill is defined in national account‑
ing in the same way as in business accounting by
reading the following citation from the SNA (2):
‘Potential purchasers of an enterprise are often
prepared to pay a premium above the net value of
its individually identified and valued assets and liabilities. This excess is described as “goodwill” …’
(2008 SNA, paragraph 10.196)
In the 2008 SNA, a composite category called
Goodwill and marketing assets is introduced, which
includes marketing assets such as brand names,
mastheads, trademarks, logos and so on, as well as
goodwill. The description of this composite item is
as follows:
‘The value of goodwill and marketing assets is defined as the difference between the value paid for
an enterprise as a going concern and the sum of
its assets less the sum of its liabilities, each item of
which has been separately identified and valued.
Although goodwill is likely to be present in most
corporations, for reasons of reliability of measurement it is only recorded when its value is evidenced by a market transaction, usually the sale
of the whole corporation. Exceptionally, identified
marketing assets may be sold individually and
separately from the whole corporation in which
case their sale should also be recorded under this
item.’ (2008 SNA, paragraph 10.199)
Here, special attention should be paid to the mean‑
ing of the term ‘liabilities’. In the citations above,
as business accountants understand the term, it is
defined as excluding shares and other equity issued
by the enterprise to be acquired. However, when
national accountants define net worth as the value
of all the assets owned by an institutional unit or
sector, less the value of all its outstanding liabilities,
(2) Three versions of the SNA will be referred to in this paper. They are
United Nations (1968), Commission of the European Communities et al.
(1993), and European Commission (2009), which are referred to as 1968
SNA, 1993 SNA and 2008 SNA, respectively.
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they regard shares and other equity as liabilities (3).
Thus the term ‘liabilities’ is given two different
meanings in the 2008 SNA. In defining goodwill
(and marketing assets) as described above, shares
and other equity are excluded from the list of li‑
abilities (as in the business accounting definition of
liabilities). However, when net worth is defined in
the context of national accounting, shares and other
equity are included in the list of liabilities (i.e. na‑
tional accounting concept of liabilities) (4).
By comparing the two concepts, goodwill and net
worth (in the context of national accounting) (5),
you can find a close relationship between the two.
That is, in the case of a corporation that has just
been purchased and merged by another corpora‑
tion acquiring the whole equity (6).
Net Worth (national accounting) = Assets – Liabil‑
ities (business accounting) – Equity (issued (7)),
and
Goodwill = Equity (issued) – [Assets – Liabilities
(business accounting)],
therefore,
Goodwill = – Net Worth (national accounting).
Then, a natural question may be whether the con‑
cept of goodwill is necessary or not in the SNA as it
is just net worth with the sign reversed.
The purpose of the present paper is to examine the
concept of goodwill in some detail. The above ques‑
tion will be answered negatively. It will be shown
that national accountants can deal with business
(3) It may be easily understood by taking a glance at Table 13.1 in the 2008
SNA, for example.
(4) Note that in United Nations (1977), the balance sheet version of the
1968 SNA, liabilities except shares and other equity are called ‘third-party
liabilities’ while equity including shares is called ‘second-party liabilities’.
(5) The term ‘net worth’ is used in business accounting as well, though in
the context of business accounting, the list of liabilities excludes shares
and other equity. The net worth formulated this way may be called the
business accounting concept of net worth.
(6) It is presupposed that the former corporation has not experienced any
acquisition before so that goodwill does not appear in its balance sheet.
(7) Shares and other equity owned are included in the list of assets in both
accounting systems.
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Will the concept of goodwill go well with national accounting?
acquisitions fairly reasonably without this concept.
The present paper is organised as follows. The next
section is devoted to business accounting history
concerning the concept of goodwill, as some facts
from history may provide insights into challenges
we face. Four theories of, or views on, goodwill in
business accounting context will be surveyed, on
the basis of which, for example, it will be examined
whether the introduction of the newly arrived cat‑
egory ‘goodwill and marketing assets’ may be con‑
sidered to be reasonable or not.
In the third section, the treatment of goodwill in the
SNA will be described more fully. In doing so, sev‑
eral important points will be made clear. It will be
shown that ‘internally generated goodwill’, another
business accounting concept, is not adopted in the
SNA (as well as in any business accounting stan‑
dard) and that goodwill is recorded only when a
business (or part of it, as in the case of Sony Corpo‑
ration’s selling its VAIO-PC business) is traded, so
it is called ‘purchased goodwill’. In addition, we will
go through topics such as amortisation/impairment
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issues, problems related to the treatment of transfer
costs involved with the business acquisition, etc. It
should be noted that at this stage, the rationale for
the concept of goodwill itself will not be challenged.
In the fourth section, focus will be on the rationale
of the business accounting concept of goodwill in
the national accounting framework. As previously
noted, it will be shown that a business acquisition
may be fairly reasonably and more naturally de‑
scribed, by regarding it as the purchase of equity,
rather than the acquisition of goodwill. It may be
noted that a business or part of it to be acquired
may be regarded as a quasi-corporation, if not a
fully incorporated business. (Purchased) goodwill
is, after all, just a token of the fact that the business
experienced a business acquisition in the past. Fi‑
nally in this section, a very interesting relationship
between the concept of net worth and Tobin’s Q, a
macroeconomic concept, will be examined.
Lastly, conclusions will be drawn and proposals will
be put forth.
2.Four theories of goodwill: a historical perspective
According to Yamauchi (2010), historically, there
have been four views on ‘goodwill’ as a business ac‑
counting concept. They are: 1) intangibles theory
of goodwill; 2) super-profit theory of goodwill; 3)
residuals theory of goodwill; and 4) synergy theory
of goodwill. They will be taken up in turn. For the
sake of convenience, in what follows, historical cost
valuations often found in business accounting will
be totally ignored. Instead, the valuation at current
prices including valuation at current replacement
cost will be presupposed.
2.1. Intangibles theory of goodwill
When an economic entity acquires a business (in‑
corporated or unincorporated), it may pay a sum of
money that exceeds the amount of the tangible and
identified intangible assets it owns net of related li‑
abilities, if any. This excess amount of money was,
according to this theory, deemed to be the sum of
the value of unidentified ‘intangibles’ including,
among others, customer loyalty in the current busi‑
ness terminology. These types of payments were
legally recognised and established by the late 19th
century and called ‘goodwill’. A well-known remark
‘(the goodwill is) nothing more than the probabil‑
ity that old customer will resort to the old place’
was made by Lord Eldon in 1810 (8). More (1891)
(p. 282) writes:
‘We all know — in a general way at least — what
Goodwill is. It is, I take it, just another name to
designate the patronage of the public.’
Thus, the continued patronage of customers includ‑
ing the factor of location was considered to be the
essential elements of goodwill in the 19th century.
However, by the early 20th century, various items
such as good business management (if the old
management is retained), excellent reputation, mo‑
(8) As cited in Yang (1927), p. 28.
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Will the concept of goodwill go well with national accounting?
nopolistic privileges, trademarks (if not separately
traded), unidentified knowhow, and favourable at‑
titudes toward the firm on the part of employees, as
well as bankers and investors (9), came to be recog‑
nised as intangibles involved in goodwill.
That is, the value of goodwill G may be expressed
as the sum of the values of unidentified intangibles
I j ( j = 1, 2, , n); so that
G = I1 + I 2 +  + I n .
It should be stressed that in the 19th century, enter‑
prises were seldom acquired by purchasing their
shares in the organised stock exchange. So, it was
necessary to evaluate the business itself without re‑
sorting to market evaluation. However, for valua‑
tion purposes, it may not be so helpful to assume
that the value of goodwill must be the total value of
intangibles involved.
2.2. Super-profits theory of goodwill
Dealing with the question ‘How the goodwill at‑
taching to a business may be valued as between a
willing seller and a willing buyer?’ (10), some ac‑
countants purported to find another seemingly bet‑
ter definition of goodwill by the early 20th century.
Thus, among others, Greendlinger (1925) (p. 166)
writes:
‘Good-will has been defined as that intangible
quality of patronage which attaches to an established business and is presumed to continue, irrespective of any change of ownership. Perhaps,
a better definition would be that good-will represents the present worth or capitalised value of
the estimated future earnings of an established
enterprise in excess of the normal results that it
might be reasonably assumed would be realized by
a similar undertaking established anew.’
The term ‘super-profits’ is due to Leake (1914)
(p. 82). A pioneering contribution by More (1891)
(9) Concerning the three categories of goodwill, consumer’s goodwill,
industrial goodwill, and financial goodwill, see Yang (1927) (pp. 41–56)
for example.
(10)This question can be found in More (1891) (p. 284).
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(p. 285) (11) gives a very simple numerical example:
‘A trading company with tangible assets, the full
going value of which is ascertained to be £100,000,
and suppose it is earning, and is likely to earn,
eight per cent., or £8,000 a year. I would say that
the total price should not exceed the value of the
tangible assets, viz., £100,000, because no more
than an ordinary return is being got.
But suppose the concern is earning, and is likely
to earn, thirteen per cent., or £13,000 a year, then
I think a fair price might be seven annual payments of the extra £5,000, or a present payment
of £26,030, being the amount of seven annual payments of £5,000, less eight percent discount. In this
case, the price would be the above £100,000 plus
£26,030, or together, £126,030.’
Why thirteen percent? The P&L statement of the
firm may provide some information needed. Why
seven years? While this may be a matter of nego‑
tiation between the buyer and the seller, it may be
understood that it was taken for granted that good‑
will should be depreciated (or amortised). For the
superior earning power was considered to decline
over time, say, due to competition.
Note that this definition is not contradictory to the
older, intangibles theory of goodwill. In fact, Yang
(1927), by maintaining basically the older theory,
sought to show that the value of intangibles is essen‑
tially an expression of the superior earning power
of the specific concern. However, it may be stressed
that the two theories are logically independent,
though some argue that goodwill in the super-profit
theory is just a measurement concept.
2.3. Residuals theory of goodwill
The residuals theory of goodwill appeared in the
early 20th century and came to be established in the
second half of the century. According to this theory,
goodwill may be defined as the excess of the value
of the business as a whole over the valuations at‑
(11)More’s paper was revised and published as More(1900–01) and the latter
was reprinted and included in Lee (1984). According to the introductory
note in the reprinted version(p. 65), ‘More’s contribution represents a
scholarly paper, well ahead of its time — the usual practice for valuing
goodwill being a multiple of total profits minus the valuation of tangible
assets (a practice which More did not favour)’.
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Will the concept of goodwill go well with national accounting?
taching to its individual tangible and intangible net
assets (12).
The residuals theory is considered to be originally
due to Canning (1929) (pp. 42–43). He preferred to
regard goodwill as ‘a master valuation account’. He
wrote:
‘Goodwill, when it appears in the balance sheet at
all, is but a master valuation account’.
That is, goodwill is the balancing item for the subaccount, which appears in the balance sheet when
a business combination occurs. So, naturally,
goodwill becomes a ‘catch-all’ item. �����������
More impor‑
tantly, he also wrote:
‘It cannot under any circumstances be called an
“asset”.’
This definition of goodwill is considered to be im‑
portant in that it is adopted by international and
national business accounting standard setters in‑
cluding the Accounting Standards Board or ASB in
the United Kingdom, among others. In fact, ASB
(1997) (paragraph 2) defines (purchased) goodwill
as ‘the difference between the cost of an acquired
entity and the aggregate of the fair values (13) of the
entity’s identifiable assets and liabilities’.
At the same time, it may be noteworthy that this
definition is quite generally accepted when the con‑
cept of goodwill was first introduced into the Sys‑
tem of National Accounts in its 1993 version. No
less important is the fact that by the second half of
the 20th century, the number of incorporated busi‑
nesses had increased drastically and acquiring busi‑
nesses by purchasing the outstanding shares on the
stock exchange became more common practice. In
fact, MacNeal (1939) (p. 233) wrote:
‘The total value of a business as a whole is best
expressed by the price of its equities in the market
place.’
However, as to the above three views on goodwill,
Hendriksen (1977) (pp. 435–369) remarks as fol‑
lows:
(12)This definition is found in Hendriksen (1977) (pp. 43–59).
(13)According to the 1982 version of IAS 16(IASC (1982)), ‘fair value’ in the
context of business accounting may be defined as the amount for which
an asset could be exchanged between a knowledgeable, willing buyer
and a knowledgeable, willing seller in an arm’s length transaction.
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‘The attempts […] to provide goodwill with semantic interpretation have basically failed. Furthermore, little or no evidence has been found to
indicate that the reporting of goodwill provides
relevant information for investors or creditors
in their decision making. Because goodwill lacks
real-world interpretation and cannot be measured
independently, it should be omitted from financial
statements. This does not mean, however, that
aggregations of resources should not be reported
separately from measurement of individual assets.
Aggregations of resources may have valuations
greater or less than the summation of identifiable
parts because of synergism among the resources
acquired or with resources already owned.’
2.4. Synergy theory of goodwill
According to the Oxford Dictionary of English, ‘syn‑
ergy’ means the interaction or cooperation of two
or more organisations, substances, or other agents
to produce a combined effect greater than the sum
of their separate effects.
By noticing that (purchased) goodwill is recorded
when an event of merger and acquisition occurs, it
is not difficult to find that there may be some syn‑
ergistic effects involved. As Hendriksen suggested,
there may also be synergistic effects among a num‑
ber of asset items in the balance sheet of the ac‑
quired enterprise as well as the acquiring firm. Be‑
cause of this, as Schmalenbach (14) correctly argued
at latest as early as 1910s, if resources are tied up
in a business, they do not possess individual values.
Instead, a collection of resources has only a collec‑
tive value. The following somewhat long citation is
from Schmalenbach (1959) (p. 26).
‘If a landlord owns ten houses, he can list their
values on the assets side of his balance sheet, the
liabilities, including mortgages, on the liabilities
side, and the result is a balance sheet which shows
the value of his capital. The accuracy of this value
depends upon accuracy of the individual valua(14)Eugen Schmalenbach (1873–1955) is a versatile German academic
whose fields include economics, sociology as well as business
accounting. Schmalenbach (1959) is an English translation of his famous
book Dynamische Bilanz (Dynamic Accounting), which first appeared in
1919 and went through several impressions.
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Will the concept of goodwill go well with national accounting?
tions. This apart, there is nothing wrong with the
procedure.
However, if a man owns a business which is made
up of buildings, machines, tools, office equipment,
stocks, debtors, creditors and more, he cannot arrive at a true value for his capital by means of the
above accounting procedure, no matter how the
individual values are arrived at; for the value of a
business does not equal the total of the values of its
individual parts.
The value of business depends upon its suitability
for the manufacture or sale of useful things. If a
collection of buildings, machines and stocks are
needed for this, then there is a collective value. As
long as they are tied up in the business, they do not
possess individual values.
The machines had individual values once, before
they were installed, when they were still in the
hands of a dealer. They can have individual values
again, if they are dismantled and sold as used machines. But as long as they are tied up in the factory there can be no talk about individual values.’
The synergy theory of goodwill emerged as the
newest theory of goodwill in the late 20th century.
Thus, Miller (1973) (p. 281) wrote:
‘The essential characteristics of a system is a collection of functioning elements, such as the parts
of an automobile engine, that work together as a
unified whole because of relationships among the
elements of the system. […] Systems may be most
complex. Some are almost incomprehensible as
aggregates of elements because interaction of the
parts results in synergy.’
In recent decades, this new theory made a big step
toward winning general acceptance in wider ac‑
counting circles. Many authors, including Ma and
Hopkins (1988), Johnson and Petrone (1998), and
Yamauchi (2010) among others, have contributed
to the development of the theory. At present, no
one can deny that the measure of goodwill includes
synergies in its core component. In fact, Johnson
and Petrone (1998) (pp. 295–296) propose that the
term ‘core goodwill’ exclude intangible elements as
well as overpayment (or underpayment) due to any
valuation error or fire sale (and so on), but just in‑
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cludes ‘going concern goodwill’ and ‘combination
goodwill’. The former refers to the synergies which
may be generated from tying up the assets in the
balance sheet of the acquired enterprise and the lat‑
ter refers to the synergies from combining the two
businesses.
Yamauchi (2010) (pp. 146–157) clarifies that the
measure of goodwill actually brought into the ac‑
counts may include the values of unidentifiable
intangibles that are not deemed to be assets in the
business accounting standard (human capital, for
example), as well as the values of unrecognised
intangible assets (certain R&D assets that were re‑
corded as costs incurred as corresponding R&D
expenditures were made). Thus, by excluding these
values, the purification of the concept of goodwill is
possible, at least theoretically.
This may be the right place to consider the newly
coined composite item ‘goodwill and marketing as‑
sets’. Here, a full description of the term ‘marketing
assets’ is given in paragraph 10.198:
‘Marketing assets consist of items such as brand
names, mastheads, trademarks, logos and domain
names. A brand can be interpreted as far more
than just a corporate name or logo. It is the overall impression a customer or potential customer
gains from their experience with the company and
its products. Interpreted in that wider sense it can
also be seen to encompass some of the characteristics of goodwill, such as customer loyalty.’
From the historical point of view, we understand
that the author is dubious about this treatment,
even on the presumption that we would accept the
concept of goodwill. For synergies involved in the
measure of goodwill and marketing assets such as
logos, etc. are so different to be wrapped up in an
item.
Understanding goodwill as a synergy is not con‑
tradictory with the residuals view on goodwill, as
the latter could be seen as a measurement concept.
However, as noted earlier, the central claim in Can‑
ning (1929) is that goodwill is not an asset, which
does not seem to be shared with advocates of syn‑
ergism.
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Will the concept of goodwill go well with national accounting?
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3.Treatment of goodwill in the SNA revisited
3.1. The introduction of the concept
of goodwill in the SNA and
challenges confronted
As noted earlier, the 1968 version of the SNA (the
1968 SNA as well as United Nations (1977) as the
balance sheet version of the 1968 SNA) lacks the
concept of goodwill (15). It was the 1993 version that
introduced the concept for the first time, though it
is somewhat different from that in the 2008 SNA.
What follows is from paragraph 12.22 in the 1993
SNA:
‘When an enterprise is sold at a price that exceeds
its net worth, this excess in purchase price over net
worth is the asset, “purchased goodwill”.’
However, this definition cannot be applied to the
purchase/sale of a corporation if the definitions of
liabilities and net worth are to be retained through
the system. In fact, in the 1993 SNA, purchased
goodwill was necessarily calculated differently de‑
pending on whether the business to be acquired
was an unincorporated enterprise or a corporation.
The following is also from the same paragraph:
‘Two cases must be distinguished. For the sale/purchase of an unincorporated enterprise not treated
as a quasi-corporation, the purchased goodwill
represents the excess of the purchase price of this
enterprise over its net worth (derived from its
separately identified and valued assets and liabilities) […] For the sale/purchase of a corporation or
quasi-corporation, the purchased goodwill represents the excess of the purchase price of its shares
and other equity over their value just prior to the
sale/purchase.’
Accounting procedures for the purchase/sale of in‑
corporated businesses were described in the same
paragraph as follows:
(15)Although no mention was made of goodwill in the 1968 SNA or United
Nations (1977), it might be quite likely that national accountants had no
choice but to use business accounting records to estimate the figures for
intangible assets except claims (non-financial intangible assets) so that
goodwill could be mingled with intangible assets like patents and copy
rights.
‘This excess enters the balance sheet of the seller
of shares and other equity prior to the sale as a
revaluation of a financial asset so that the shares
and other equity can be sold at their purchase
price. At the same time, the purchased goodwill
enters the other changes in the volume of assets account as an economic appearance of an intangible
non-produced asset and is recorded as such in the
closing balance sheet of this corporation or quasicorporation. The sales and purchases of the shares
and other equity are recorded in the financial accounts of the seller and the purchaser.’
Thus, in the 1993 SNA, goodwill for the purchase/
sale of incorporated businesses was defined dif‑
ferently from the concept in the original business
accounting context. This definition of goodwill
(specifically for the purchase/sale of incorporated
businesses) may sound ridiculous to business ac‑
countants. In fact, they have never encountered a
treatment of goodwill like that in the 1993 SNA.
Thus, the 1993 SNA failed to introduce the concept
of goodwill in a way that would satisfy business ac‑
countants, although it seems that it did try not to
disturb the conceptual framework of the SNA. In
passing, it introduced a new category called ‘intan‑
gible non-produced assets’, inclusive of goodwill,
replacing the older term ‘non-financial intangible
assets’.
The 2008 SNA took a different approach. That is,
it tried to incorporate goodwill just as business ac‑
countants understand the term. However, as a mat‑
ter of course, the strategy resulted in inconsistencies
brought into the system, as was noted earlier. Thus,
there were challenges to be met. That is, in order
to include goodwill in the list of intangible assets
of the conceptual system of the SNA, national ac‑
countants need to modify the business accounting
concept of goodwill or to tolerate inconsistencies
brought in. Incidentally, a new category ‘non-pro‑
duced non-financial assets’ was created in the 2008
SNA, making the tangible-intangible distinction a
fringe one.
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Will the concept of goodwill go well with national accounting?
In what follows in this section, some additional de‑
scriptions of goodwill in the SNA will be given and
examined.
3.2. The exclusion of internally
generated goodwill
With regard to the definition of goodwill in the
2008 SNA cited earlier in the present paper, it may
be noted that goodwill is recorded only when a
business (or part of it) is actually traded. This type
of goodwill is called ‘purchased goodwill’ (16). It is
the case with the 1993 SNA version of the concept
as well. In fact, according to paragraph 12.22,
‘Goodwill that is not evidenced by a sale/purchase
is not considered an economic asset: the only way
that goodwill enters the System is for such a purchase to occur (17).’
However, goodwill, which is defined as the excess of
the sale/purchase price of the business over its net
worth (business accounting concept), may be con‑
ceivable even when an actual sale/purchase does
not occur, by estimating the sale/purchase value of
the enterprise. It may particularly be the case when
the incorporated enterprise is listed and its shares
are traded in the stock exchange. Goodwill in this
case may be called ‘internally generated goodwill’.
Business accounting standards uniformly rule out
the concept. In fact, for example, Ma and Hopkins
(1988) (p. 84) described the concept as an ‘Alice-inWonderland’ type of accounting concept. The SNA,
in its 2008 version, excludes the concept as well.
The third chapter of Bloom (2008) gives an excel‑
lent account of how the goodwill write-up was tem‑
porarily condoned and brought an anomaly into
the accounts in the early 20th century before the De‑
pression era and how non-recognition of internally
generated goodwill was established in the United
States after the period.
(16)The term ‘purchased goodwill’ may be used in another context in which
the amount does not include the minority owners’ equity. The 2008 SNA
is not so clear about how you can deal with it.
(17)The first half of this sentence may be found in paragraph 12.26 in the
2008 SNA as well.
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3.3. Negative goodwill
According to the definition of goodwill in the 2008
SNA, it may be understood that goodwill may well
be negative. In fact, the 2008 SNA specifically ac‑
cepts that the measure of goodwill can be negative.
What follows is from paragraph 12.33:
‘The value (of goodwill) may be positive or negative
(or zero). By its calculation and designation as an
asset of the enterprise, the net worth of the enterprise at the moment it is bought is exactly zero,
whatever the legal status of the enterprise.’
The treatment of negative goodwill in business ac‑
counting standards varies. Regarding it as a profit
on acquisitions, seems to be a typical response to
the situation by business accountants. From what is
cited, again, it may be known that goodwill + net
worth (in the sense of national accounting) = zero.
3.4. Appearance of goodwill in the
accounts and amortisation/
impairment
According to paragraph 12.34 in the 2008 SNA, the
recording of the appearance of goodwill (and mar‑
keting assets) will be made as follows:
‘The value of purchased goodwill and marketing
assets is calculated at the time of the sale, entered
in the books of the seller in the other changes in
the volume of assets account and then exchanged
as a transaction with the purchaser in the capital
account.’
The entries are as follows. Goodwill and market‑
ing assets first appear in the balance sheet of the
seller via the other changes in the volume of as‑
sets account. The entry is an economic appearance
of a non-produced non-financial asset. Then the
disposals (acquisitions) of the item are recorded
in the capital account of the seller (the purchaser)
as ‘disposals (acquisitions) of non-produced nonfinancial assets’. And then, goodwill and marketing
assets are recorded in the closing balance sheet of
the purchaser.
The next step is to record the amortisation of the
asset in question. What follows is from the same
paragraph:
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Will the concept of goodwill go well with national accounting?
‘Thereafter the value of the purchased goodwill and
marketing asset must be written down in the books
of the purchaser via entries in the other changes
in the volume of assets account. The rate at which
it is written down should be in accordance with
commercial accounting standards. These are typically conservative in the amount that may appear
on the balance sheet of an enterprise and should
be subject to an “impairment test” whereby an accountant can satisfy himself that the remaining
value is likely to be realizable in case of a further
sale of the enterprise.’
Business accounting rules concerning amortisation
(and impairment tests) vary over time, as well as
from country to country. Thus, while the IFRS (In‑
ternational Financial Reporting Standard) prohib‑
its amortisation and requires the implementation
of an impairment test at least once a year, a regular
amortisation of goodwill over its economic life (20
years at longest) is mandatory under Japanese busi‑
ness accounting standards. However, to enhance
international comparability of business account‑
ing records, voluntary application of the IFRS rules
started from the consolidated fiscal years ending on
or after March 31, 2010 in Japan. It may be worth
mentioning that business circles in Japan claimed
that the application of the IFRS rules to financial
reporting would encourage M&A activities by Japa‑
nese companies.
Nevertheless, some business accounting specialists
in Japan now argue that the application of the IFRS
rules will make some accounting figures, including
profits in addition to goodwill itself, rather unstable
over time. Thus, if national accountants have no
choice but to rely on business accounting records
to estimate goodwill figures in national accounts, it
should be understood that the figures will be highly
3
volatile and country-to-country comparability may
be quite doubtful.
In any case, the 2008 SNA stipulates the use of an
amortisation rule together with an impairment test
approach. While the scope of asset items over which
the impairment test should be applied is not clear in
the above paragraph, a possible criticism against the
treatment may be that some elements of internally
generated goodwill could be mixed up in the mea‑
sure because the futuresale value may include them.
3.5. Costs of ownership transfer
This point is related to costs associated with the
acquisition (disposal) of goodwill. Of course, in
the SNA, goodwill is one of the categories of nonfinancial non-produced assets, so that the costs
of ownership transfer incurred with regard to the
acquisition (disposal) of goodwill are treated as
fixed capital formation. However, the acquisition
(disposal) of goodwill can be done only through
the acquisition (disposal) of a business, while the
purchase of the business can be done by acquiring
the controlling equity in it.
Because equity is in the list of liabilities in the SNA,
the costs of ownership transfer involved with the
acquisition (disposal) of equity are treated as inter‑
mediate consumption. For example, research costs
(including fees paid to financial advisers) about the
enterprise to be acquired may be incurred by the
acquirer. Are they intermediate or final?
Japanese business accounting standards recently
changed their position concerning the treatment of
financial adviser’s fees. Previously, they were con‑
sidered part of goodwill, but now they are regarded
as current outgoings.
4.How you can do without the concept of goodwill
4.1. How to record business acquisitions
incorporated entity.
Regardless of whether the business is incorporated
or not, the fact that it is sold, tells us that it can be
deemed to be at least a quasi-corporate if not a fully
However, in practice, it is perfectly possible that
the business (to be sold) is just part of a household,
previously. In such cases, it is necessary for the busi‑
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Will the concept of goodwill go well with national accounting?
ness in question to be reclassified to the corporate
sector (from the household sector) prior to the sale/
purchase. It is assumed that the household sector
now has equity in the quasi-corporate. The equity in
question must be introduced into the system via the
other changes in the volume of assets account, as an
economic appearance of financial assets/liabilities
(assets of the household, liabilities of the quasi-cor‑
porate). Then, when a business acquisition occurs,
the sale/purchase of the equity of the business is re‑
corded. The value of the equity in question depends
on the purchase price of the business that was for‑
merly part of a household.
After the acquisition, the business is merged into
the acquiring corporation; therefore the equity will
disappear because the issuer of the particular li‑
abilities is merged with the holder of it. The share
price of the acquiring entity and hence net worth
(national accounting concept) of the corporation
may increase or decrease depending on the market
evaluation of the acquisition. It seems that there is
no room for the entry of goodwill.
4.2. T-form presentations relating to
purchased goodwill, internally
generated goodwill and net worth
Table 1a shows the balance sheet of the business to
be acquired by using national accounting concepts.
Suppose that the business to be acquired has not ex‑
perienced any acquisition before, and the purchase
price of the business is the transaction value of its
shares outstanding. In the table, this value is shown
as equity (18). The same situation is shown differ‑
ently in Table 1b.
Table 1a: The balance sheet of the business to be acquired (by using national accounting concepts
only)
Assets
Liabilities other than equity
Equity
Net worth
Note: The business to be acquired has never experienced acquisition so that assets on the left-hand side do
not include goodwill.
Table 1b: An alternative presentation of the balance sheet of the business to be acquired (with
net worth as a business accounting concept)
(–) Net worth = Goodwill (to be re‑
corded in the acquirer’s accounts)
Equity
(–) Net worth (*)
Note: Purchased goodwill to be recorded in the account of acquiring business equals to (–) Net worth (national accounting concept) of the business to be acquired.
60
Let us suppose that an enterprise experienced ac‑
quisition once in the past. Goodwill was recorded
then and has been written down at a certain previ‑
ously-determined rate until now.
the tangible-intangible distinction that you may
find appearing on the debit side of the accounts (19)
almost ceased to exist in the 2008 SNA. In Table 2b,
net worth is defined in the fashion of business ac-
Tables 2a-d show the balance sheet of the enterprise
in four different ways. Table 2a is a national ac‑
counting presentation of the situation, even though
(18)In the T-forms in this section, asterisk (*) denotes that the item is a
business accounting concept.
(19)Computer software should be deemed to be tangible except for certain
development costs. See Sakuma (2013) (pp. 564–65).
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Will the concept of goodwill go well with national accounting?
counting. In Table 2c, the situation involves the
write-up of internally generated goodwill. In
3
Table 2d, the same situation as Table 2c is presented
in a somewhat different way.
Table 2a: The balance sheet of the acquiring business some years later (by using national
accounting concepts only)
Tangible assets
Intangible assets other than goodwill
Purchased goodwill
Liabilities other than equity
Equity
Net worth
Note: A close relationship between purchased goodwill and net worth that existed at the time of the
acquisition is not retained because of amortisation.
Table 2b: The balance sheet of the acquiring business some years later (by using a business
accounting concept of net worth)
Tangible assets
Intangible assets other than goodwill
Purchased goodwill
Liabilities other than equity
Net worth (*)
Note: The lack of equity data in the account makes business accounts less informative.
Table 2c: The situation involving the write-up of internally generated goodwill
Tangible assets
Intangible assets other than goodwill
Purchased goodwill
Liabilities other than equity
Net worth (*)
Internally generated goodwill
Note: The write-up of internally generated goodwill may make the business accounting concept of net
worth less useful.
Table 2d: A presentation using national accounting concept of net worth
Tangible assets
Intangible assets other than goodwill
(–) Net worth
(Purchased goodwill)
(Internally generated goodwill)
Liabilities other than equity
Equity
Note: Net worth that appears with the reversed sign on the left-hand side of the account is defined in a national accounting fashion, but the list of assets excludes purchased goodwill as well as internally generated
goodwill. This form of presentation is somewhat similar to 'market capitalisation statement' in Bloom (2008).
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Will the concept of goodwill go well with national accounting?
From the presentations above, it may be concluded
that it is quite difficult to measure purchased good‑
will over time separately from internally gener‑
ated goodwill. A particular business acquisition
brings about a particular synergy which is subject
to change over time. This cannot be estimated in‑
dependently from synergy newly created after the
acquisition. Thus, goodwill evidenced by a business
combination will be inevitably mixed up with inter‑
nally generated goodwill. It is net worth, (as a na‑
tional accounting concept) not purchased goodwill,
that is meaningful.
As already shown, business acquisition may be ac‑
counted for more naturally by regarding business
acquisition as the purchase of equity rather than the
acquisition of goodwill. An interpretation may be
that purchased goodwill is, after all, just a token that
shows the entity experienced a business acquisition
in the past.
In addition to inconsistencies brought into the sys‑
tem as already mentioned, by considering practical
difficulties about using business accounting data to
estimate comparable figures for goodwill (and mar‑
keting assets), this author would like to propose to
end the use of the concept.
4.3. Tobin‘s Q from the viewpoint of
synergy
James Tobin, Nobel laureate in Economics, devised
a ratio called Tobin’s Q, which may be defined as:
the market value of the firm
the replacement value of the firm ' s assets
Here, the market value of the firm means the to‑
tal market value of its shares and other equity and
the firm’s assets should be understood to be its net
worth as a business accounting concept. The origi‑
nal formulation of Tobin’s Q may be found in Tobin
(1969). Although a prevalent adjustment-cost type
of interpretations of the Q theory may be found in
Yoshikawa (1980) and Hayashi (1982) among oth‑
ers, his own account of Tobin’s Q may be found in
an interview with The Region, a periodical issued by
the Federal Reserve Bank of Minneapolis (20):
(20)Tobin (1996).
62
‘The idea is to think about the productive, physical
assets of a company — maybe people think of it as
book value of a company — but convert that into
the replacement cost of the assets, not the original
cost. How much would it cost to buy the assets
again, new, off the production line? So, that’s one
valuation of the firm.
Looking at it that way, then, there’s the market
valuation, and one way of having a market valuation would be to have used capital goods markets
— used car markets or used house markets. But
for many things that’s not a practical matter, so we
have a used business market implicit in securities
markets, stock and bond markets. And that’s the
ratio. The replacement costs are the denominator,
the securities market valuations are the numerator.
Now, you might think that the value of this should
be 1, that arbitrage would keep the two valuations the same. If people have a choice, they either
buy new, build a new plant or buy another firm
that already has a plant, in the securities market.
That’s arbitrage. Now, of course, there are going to
be deviations from 1, obviously, even if the measurements were precise, which they’re not — there
would be deviations from 1 because of goodwill or
monopoly value or things like that. But at any rate,
it is possible to estimate this number on an aggregated basis as well as on a disaggregated basis.’
Tobin’s Q, as a theory of the investment behaviour
of a firm, may be most easily understandable by
reading the paragraphs cited from Schmalenbach
(1959) again. According to this citation, tying up
the assets makes synergism. If a positive synergy
is generated, investment in these assets may bring
gains to investors. Thus, the fact that Tobin’s Q >1
may be regarded as a stimulus to investment (21). In
fact, by deleting goodwill from the asset list if necessary,
Tobin ' s Q =
Equity
> 1 or < 1
Assets − Liabilities other than equity
is equivalent to
(−) Net worth > 0 or < 0.
(21)About the Q-theory of mergers, see Jovanovic and Rousseau(2002),
for example.
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Will the concept of goodwill go well with national accounting?
Noteworthy may be the fact that Tobin suggested
goodwill and intangibles may be regarded as dis‑
turbing factors to the functioning mechanism of
Tobin’s Q. In fact, in following the cited paragraphs
above, he wrote:
3
be very informative for telling you about Microsoft. If
more of the economy is like that, it’s going to be different from what it used to be.’
Because intangibles including intangible assets (hu‑
man capital, copyrights and so on) and tangible
assets (machines, farm land, factories, computer
software) have different positions in the produc‑
tion process of the firm that ties up these assets,
they should be differently treated in the calculation
of Tobin’s Q. For example, deducting the value of
intangibles as well as goodwill from the numerator
and denominator may be one possibility. That is,
modified Tobin’s Q may be defined as follows:
‘Now, it is true that there may be a change in the ratio
between goodwill, human capital, things that are not
in the commodity market, that are the basis for the
valuation of firms — like Microsoft. Microsoft is not
being valued at what it is now because of bricks and
mortar and even chips-microprocessors. It is being
valued as it is now because it has a kind of monopoly
lead based on its ability to keep innovating and to
have its hands on human capital of a superior kind
Equity − the value of intangibles
— an organization of a superior kind. So, if that’s the Modified Tobin ' s Q =
Assets less intangibles − Liabilities other than equity
Equity − the value of intangibles
case, then the ‘q’ ratio, which requires a replacement
Modified Tobin ' s Q =
Assets less intangibles − Liabilities other than equity
cost calculation in the denominator, is not going to
5.Conclusions and proposals
Conclusions are as follows:
(1) While there have been different views on
goodwill, the synergy viewpoint may be most
persuasive.
(2) The concept of goodwill is not necessary for
national accountants and goodwill should be
excluded from the list of assets.
(3) Business acquisition can be dealt with and ana‑
lysed not by using the concept of goodwill, but
by using equity (market capitalisation) and net
worth as a national accounting concept.
In addition, the present paper showed:
(5) There is a very interesting relationship between
net worth as a national accounting concept
and Tobin’s Q.
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Acknowledgements
This paper was originally prepared for the 33rd General Conference of the International Association for
Research in Income and Wealth, Rotterdam, the Netherlands, August 24–30, 2014. Among his many debts,
the author is grateful to Erich Oltmanns, who discussed the paper at the conference, as well as Peter van de
Ven, André Vanoli, and Albert Braakmann, who gave valuable comments. In addition, he is deeply grateful
to Aki Yamauchi; discussions with her on the business accounting treatment of goodwill was of great help
for him to improve the previous version of the paper. This work was supported by JSPS KAKENHI Grant
Number 24530233.
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